Today was all about 'bad data' being 'good', supply fears being eased by the reduced Treasury Refunding news, and a terrified (or satisfied) Fed watching long-end rates soar out of their control (thanks to Bidenomics).
As Goldman noted, the Treasury refunding announcement arguably took up more airtime than the Fed today. This happens every quarter and is an indication of how many bonds the Treasury intends on issuing (selling) in the next quarter, as well as a breakdown of what maturities those bonds will be issued in. From a supply and demand perspective, the report came in lighter than expected with the US Treasury booting refunding by $9bn to $112bn (below $114bn estimates). This means less 10s and 30s vs 2s, 3s, 5s, 7s and bull flattening in yields (US 10YR -17bps @ 4.76% / US 2YR -13bps @ 4.95%).
The Fed's acknowledgement of 'tightening financial conditions' - something we have been discussing for weeks - was key today (even though it is, for now, having no impact on the economic data)...
As JPM's Priya Misra noted: it "looks like the Fed is buying time until the long and variable lags can work through the system."
Powell didn't help early on in his press conference, with some hawkish-sounding comments:
*POWELL: PROCESS OF GETTING INF. TO 2% HAS LONG WAY TO GO
*POWELL: FULL EFFECTS OF TIGHTENING YET TO BE FELT
*POWELL: NOT CONFIDENT WE'VE REACHED STANCE FOR 2% INFLATION
"Powell the Merciful" pic.twitter.com/djqclqLPOt— zerohedge (@zerohedge) November 1, 2023
The ramp higher in stocks started at 1443ET - take your pick of what triggered the happy algos:
14:43 - Fed Chair Powell (Q&A) says Fed staff did not put a recession back into their forecast at this meeting
14:44 - Fed Chair Powell (Q&A) says financial conditions have clearly tightened; over time that will have an effect, we just do not know how quickly that will be
14:47 - Fed Chair Powell (Q&A) says Fed is not thinking about rate cuts right now at all, is not thinking or talking about rate cuts; are focused on if Fed is sufficiently restrictive; The question Fed is asking, is should we hike more
14:50 - Fed Chair Powell (Q&A) says they are very focused on getting confident that the Fed has achieved a sufficiently restrictive stance of policy
14:52 - Fed whisperer WSJ Nick Timiraos 'translated' Powellspeak for us into a dovish angle...
nikileaks dovish https://t.co/ukjmoJnfgL— zerohedge (@zerohedge) November 1, 2023
14:53 - Fed Chair Powell (Q&A): Fed still believes it is likely they will need to see slower growth and softening in labour market conditions
14:55 - Fed Chair Powell (Q&A) says it is still very hard to say the length of lags of policy, Fed has to make policy under great uncertainty, this is one reason Fed have slowed process down this year, they cannot rush it. Slowing down is giving us a better sense of how much more we need to do. if we need to do more.
14:57 - Fed Chair Powell (Q&A): Dot plot is a "picture in time" of appropriate policy in light of policymakers personal views, efficacy of dot plot decays during the inter-meeting period, we try to be transparent in our thinking. As we approach next meeting, we will be talking about how we parsing the data.
15:00 - Fed Chair Powell (Q&A): Fed has come very far with this rate-hike cycle, Fed is close to the end of the cycle; Fed is proceeding carefully
15:01 - Fed Chair Powell (Q&A) says Fed is not considering changing pace of balance sheet run off. QT may be playing a relatively small role in the rise in longer-term rates. Reserves are not even close to scarce at this point
All of which led to dovish drops in rate-change expectations...
As Goldman's Chris Hussey noted earlier, at the heart of today's asset price moves lies a theme that has been playing out in markets for much of the post-pandemic era: the interplay and evolving relationship between inflation, growth, and rates.
With inflation finally on a path back to normal, and rates at the highest level they've been since before the Great Financial Crisis, the markets' focus is on growth.
Normally, ~5% GDP growth (as we experienced in 3Q23) would be a good thing (and it still is, generally), but the impact of such high growth on rates (and the reaction function of the Fed) has been making better growth data not such a good thing.
Simply put, there can be too much growth for the market's appetite of course.
So, today's potentially slower growth trajectory (signaled by PMI/ISM) is being, unsurprisingly, taken as a good thing.
Today, the market only had eyes and ears for dovish thoughts and stocks ripped higher during Powell's speech to end significantly higher with Nasdaq leading the charge and Small Caps rebounding into the green...
Treasury yields plunged, dropping first on weak ISMs and ADP, and then during Powell's presser. The belly outperformed on the day but the entire curve collapsed (5Y -20bps, 2& and 30Y -15bps)...
That was the biggest daily drop in yields since March.
Before we leave stocks and bonds, we note that Stan Druckenmiller explained on CNBC this morning how messed up our fiscal stance is, and how The Fed has enabled it. But one of his more prescient observations was that: "...bonds are adjusting to a post-QE world, but for some reason equities haven't." We agree, but it looks like they are starting to get the joke...
2Y yield plunged back below 5.00%, hitting the spike lows from the safe-haven move after Israel...
The yield curve (2s30s) continues to swing wildly...
The dollar leaked dovishly lower on the day...
Ethereum surged up to $1850 (as bitcoin ended unch)...
Oil trading was wild today with WTI soaring up to erase yesterday's losses and then giving it all back and more. WTI has perfectly erased all of the war-premium from Israel...
Spot Gold declined to $1970 intraday but bounced back to end only marginally lower on the day
Finally, while Janet Yellen is ridiculously claiming that higher long-end rates is due to 'economic growth' (don't show her Atlanta Fed's latest GDPNOW signal), yields could be rising for a much, much more serious reason...
...the sovereign risk of 'Murica is on the rise and the long-bond appears to be reflecting that 'risk' (something it has not done in the past). Even Fed Chair Powell made it clear: Longer-term rates that have moved up can’t just be a reflection of expected policy moves. Damn it, Janet!